For Europe’s start-ups, Silicon Valley still calls

Is there life outside of California for Europe’s tech community?

By

KimHjelmgaard

LONDON (MarketWatch) — “Go West,” young technology company. That sentiment, with its compass-point directive, is both a rallying cry and a death knell in Europe’s war to assert the credentials of its homespun technology entrepreneurs.

Divided by geography, language, regulation and, in some cases, just old-fashioned cultural prejudice, the region has struggled to shed fully its image as a place where men and women with ideas are born, but where they do not necessarily stay, prosper or secure funding.

And that’s despite some global-headline-grabbing deals recently for some of the Old World’s most innovative and promising young companies. Evidence that this unofficial tradition of European entrepreneurs leaving for the U.S. in order to make good on their business models is, at the very least, undergoing a period of critical self-examination.

A view of downtown San Jose, Calif., the self-proclaimed capital of Silicon Valley.

In May, for example, Microsoft Corp.
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paid $8.5 billion to buy Luxembourg-headquartered Skype Technologies S.A., while social-media darling Twitter opened its wallet to the tune of $40 million for London’s TweetDeck. Swedish music-streaming service Spotify, meanwhile, is steadily inching closer to a U.S. launch and back in 2007, CBS Corp.’s
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CBS Interactive division acquired U.K. music website Last.fm for about $280 million.

The area around London’s Old Street, in the east of the city, increasingly known for its relative high density of technology start-ups, has even eagerly latched on to — although some are now just as keen to disavow it — the “Silicon Roundabout” sobriquet. View a 360-degree panorama of London’s Silicon Roundabout

The capital injections keep coming, in fact. There was Rovio Mobile Ltd.’s (Finland) runaway success with “Angry Birds,” which led to $42 million in financing from Accel Partners and others; $24 million for Germany’s social-games developer Wooga; and $119 million for Britain’s e-lender Wonga. And there’s more, potentially, for targets from Madrid to Revkjavik.

Mark Rock

Mark Rock, founder and chief executive of British start-up Audioboo.

But the U.S., and in particular the fertile technology corridor of California’s Silicon Valley, is still regarded by some Europeans as a kind of venture-capital-finance Shangri-La, with backers in the area very much viewed as that most digestible type of fruit: the low-hanging kind.

“There is a culture among venture capitalists in the U.K. of not really understanding the Internet,” said Mark Rock, founder and chief executive officer of London-based Audioboo, a social-networking tool that allows users to make instant, on-the-go podcasts and to easily share them.

“In the U.K., everyone hates failure, and that’s an old story here and it hasn’t really changed,” said Rock, who, in addition to putting his own money into Audioboo, has secured funding from a couple of British-based business angels as well as Imagination Technologies Group PLC (IMG) and UBC Media Group.

Still, for European technology entrepreneurs like Rock, a common refrain they come up against is “you’re too early.” Venture capitalists in Britain, Rock said, “prefer to invest in things, not ideas — historically, we like factories.”

But this attitude toward funding, outdated or not, while it poses some more fundamental questions about the region’s approach to risk as well as indirectly interrogating the guile of its entrepreneurial community, also speaks to the cultural waters in which some start-ups here swim.

“‘Get a proper job and pay the mortgage’ is deeply ingrained in the British psyche,” said Rock. “Whereas I always say that what I do is ‘shoot the gun, then go looking for the target.’”

Loic Le Meur, who was in London last month to talk with British Prime Minister David Cameron’s government about moving Le Meur’s influential Internet conference LeWeb from Paris to London in time for the 2012 Olympics, told a not dissimilar story.

“In the [San Francisco Bay Area] you feel like everything you do relates to technology,” he said. “Everything is about raising money, getting funded and doing deals.”

Le Meur, who moved to San Francisco four years ago and now runs Seesmic, a software company that makes it easier for users to corral all of their social network activity in one spot, said that while in Europe a start-up’s reach and capacity for success early on is often curtailed by geography, in Silicon Valley he feels as if he lives and works on a technology campus.

Illustrating Le Meur’s point is the most recent report from The National Venture Capital Association, the body that represents the venture capital community in the U.S. There were 791 venture capital firms in existence in the U.S. in 2010, the study estimates — about 10% fewer than in 2000, but more than double the number operating in 1990. And, furthermore, in 2010, California-domiciled venture firms managed a staggering 48% of the industry’s total invested venture capital for the year. View a data visualization that shows 2010 venture capital deals by U.S. state

“The nascent deployment of venture capital in other countries is gated by a country’s or region’s cultural fit, tolerance for failure” and “the willingness of big business to purchase from small companies,” the NVCA report notes. And the report may be on to something.

In Britain, for example, the British Venture Capital Association‘s 2010 annual report shows that there were 194 active venture capital firms that invested in around 800 U.K. companies. However, only 100 or so of these firms received funding, from domestic sources, at the seed or start-up stage. In other words, very early on in their life cycles.

In the U.S., by contrast, well over 1,000 companies, according to the NVCA study, received venture capital funding in 2010 at these formative stages.

Similarly, on the Continent, there were 950 active venture capital firms in 2010, according to research compiled by the European Venture Capital Association. But of these 950 firms, only 90 invested at the seed stage, while 479 contributed at the start-up stage.

Europe, it’s worth noting, has a population of close to 900 million if you include nations like Russia and Turkey on its eastern fringe. In the U.S., there are just over 300 million people. Looked at this way, you could say that with one-third of the available population at their disposal, U.S. venture capitalists are putting their start-up money to work at double the rate, on an unadjusted basis, of their European counterparts.

Patience equals ecosystem

Britain’s Songkick is one of the new breed of European start-ups that has a complicated relationship with Silicon Valley. In late June, the London-based music-concert site unveiled its first iPhone app and promptly secured over 100,000 downloads in just a few weeks. Songkick aggregates ticketing information from about 150 sources around the Internet and is seeking to be a credible alternative to No. 1 music-ticket player Live Nation Entertainment Inc.
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Luca Sartoni

At home in San Francisco: Loic Le Meur

Yet while Songkick gets most of its investment from the U.K., it owes at least a part of its current upward trajectory to relationships forged in Silicon Valley. And, unusually for an early-stage European start-up, Songkick maintains an office in San Francisco. “If you want to be close to the platforms that you rely on for growth and product opportunities, you need to spend time in Silicon Valley,” said Ian Hogarth, Songkick’s co-founder and chief executive officer, who is London-based but said that up to about one-third of his time is spent in the Bay Area. “Most start-ups like us are building on top of other, invariably U.S. platforms, and so it would be crazy not to be engaged with the scene there.”

What’s more, Songkick received, at its outset, a tangible boost following its inclusion in the prestigious U.S.-based Y Combinator program, a digital boot camp for budding entrepreneurs run under the watchful eye of programmer and venture capitalist Paul Graham. While there are European equivalents to this — Seedcamp, Startupbootcamp, Le Camping — none have quite the cache or reach. At least not yet.

‘I always say that what I do is shoot the gun, then go looking for the target.’
Mark Rock, Audioboo

Saul Klein, a partner at Index Ventures in London and an early backer of Songkick (and himself a Silicon Valley alum), said that “Europe is 15 years into the development of its technology ecosystem while Silicon Valley is 50 years in.”

Martin Varsavsky, founder of Fon, the Madrid-based Wi Fi-network company and an active entrepreneur and blogger as well as a vocal advocate for innovation in the European technology space, was also bullish on Europe’s prospects for moving out of Silicon Valley’s shadow.

“This is the answer!” he said, before pointing to a video available on YouTube that he appeared in titled: “Why you should not move your company to Silicon Valley.”

Addressing a group of would-be European entrepreneurs, Varsavsky admits in the video that “it’s sad that we need to read ourselves through Silicon Valley to believe in ourselves. It’s a paradox. But it’s remarkable because we [Europe] have the largest GDP in the world” and when you really study it, he said, “Google makes more money in Europe than it does in the U.S.”

Plus, Varsavsky said, there’s a lot of originality in Europe, but we have a hard time putting it altogether.

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